The Basics of Accounting (and 20 Common Terms You Should Know)

Accounting is essential for the success of a business, both large and small. Whether you record and analyze your financial operations yourself or outsource your bookkeeping, it’s crucial to know the basics.

Starting with the big picture: what exactly accounting means. Accounting is the process of recording, tracking, and organizing all of a company’s financial transactions on a regular basis and analyzing that data to create financial statements or models. Keeping track of your accounting is fundamental to keep your business afloat— it displays your business’s financial health, such as its profitability (or lack thereof), the value of your assets and liabilities, and the specific amounts of money flowing in and out of your business at any given time.

General Ledger

Now to get into the details of accounting, starting from the top: the General Ledger. A General Ledger is the master record of a company’s financial transactions. General Ledger Accounts make up the General Ledger. Usually, there are five specific accounts in the General Ledger: assets, liabilities, Stockholder’s equity, income, and expenses.

Balance Sheet Accounts make up the first three account categories. They provide the groundwork for a Balance Sheet, which is essentially a record of a company’s assets, liabilities, and equity at one point in time. The other two account categories are considered Income Statement Accounts, which make up the data in an Income Statement, a report of a company’s revenues, expenses, and overall net income over a certain period of time.

Balance Sheet Accounts

Assets are items, tangible and intangible, owned by a company that hold monetary value. Asset accounts typically include but are not limited to cash, equipment, inventory, properties, copyrights, and Accounts Receivable, which is an asset that is owed to a business and hasn’t yet been paid for by customers or clients.

Liabilities are simply debts that a company owes. Liability accounts typically include but are not limited to Accounts Payable (a liability that a business owes to its creditors or vendors for the products or services it purchases), income taxes payable, interest payable, Unearned Revenue (revenue obtained when a customer pays for goods or services before actually receiving that good or service), and Accrued Expenses, which are expenses that have been added to the books on the date of transaction, before they have actually been paid.

Stockholder’s (or Shareholder’s) Equity is a company’s value determined after all liabilities have been paid. Put simply, subtracting total liability from total assets makes up this value. Common Stock, Retained Earnings, Preferred Stock, and Treasury Stock are all examples of Stockholder's Equity accounts.

Income Statement Accounts

Revenue is pretty self-explanatory, though an important thing to note is that there are two types of revenue. Operating Revenue accounts for money earned from sales or other primary business endeavors. Non-Operating Revenue is money made outside of normal business activities, such as investments and dividend income.

Expenses also don’t need a lot of explanation— like revenue, expenses can be placed into two categories. Operating Expenses are costs that are necessary to generate revenue, such as overhead expenses like rent, utilities, and wages. Non-Operating Expenses cover any costs that do not contribute to Operating Revenue, such as Interest Expense.

Subledgers

Remember those subcategories we mentioned earlier, such as Accounts Payable and Accounts Receivable? They are officially called subledgers, or subsidiary ledgers, which are exactly what they sound like: subsets of the general ledger that are used to refine the organization of transactions. Most everyday transactions occur within these subledgers, and then the totals from these transactions feed into the general ledger. Accounts Payable and Accounts Receivable are two of the most common subledgers, but we’ll share more that you may need to know.

First, there are the Purchase Ledger and Sales Ledger, which are both self-explanatory. An Inventory Ledger account, as it might sound, covers the information about all inventory a business has, including raw materials, preferred vendors, damage reports, and so on. A Fixed Assets Subledger details the information about a business’s Fixed Assets, which are tangible assets that are used long-term to provide goods or services, such as equipment, plants, or other property. These assets are very important to track as their values appreciate or depreciate over time.

Oil & Gas Accounting

Some of these accounting terms may sound simple, but when accounting for the Oil & Gas industry, keeping track of your transactions gets much more complicated. Oil & Gas companies can be categorized into three different sectors, depending on their function within the industry: upstream, midstream, and downstream.

All of these sectors have different accounting functions. Gas plant/midstream accounting focuses on product gathering, storage, treatment, and processing, while downstream accounting focuses on refining, distribution, and inventory. For upstream companies, however, things aren’t so simple. Upstream companies will have to, on top of their normal ledgers, account for joint operating agreements, lease acquisitions, exploration activities, and several other activities. These activities, of course, all have their own sets of rules.

If a company wants to participate in a joint venture, they'll need to implement Joint Interest Billing into their accounting practices. Joint Interest Billing (or JIB), according to COPAS, is “the mechanism for the operator to report joint account charges for a well or facility to the working interest owners in the oil and gas industry.” To keep track of all the specific areas of JIB, upstream companies will need an entire team of accountants. If a joint venture involves a particularly large number of companies, this is especially true. For E&P operators, all these variables can be incredibly tough to keep track of.

Outsourcing your Accounting Processes

If that sounds like a lot to handle, you don’t have to do it alone. Outsourcing, in the context of accounting, is letting a third-party handle some, if not all, of your accounting functions on your business’ behalf. Keeping track of finances can be much less overwhelming by having a back office. It can be a much cheaper option than hiring a team of in-house accountants and a more efficient way to stay on top of your books. By working with an outsourced accounting team like PetroLedger, the hours you’d spend on paperwork would become hours spent focusing on production.  

PetroLedger has a team of over 100 professionals who have spent decades learning the ins-and-outs of oil and gas accounting. They know the rules, tricks, and pitfalls that many businesses run into in the industry. Interested in switching to outsourced accounting? Contact our Sales Team for more information on how PetroLedger can help you amplify your bookkeeping and grow your business. If you want to read more Oil and Gas insights from PetroLedger, check out our blog!